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Gold/Mining/Energy : Schlumberger - The biggest/baddest oil service company
SLB 45.82+0.4%11:06 AM EDT

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From: Dennis Roth1/19/2008 9:28:53 AM
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Schlumberger, Ltd. (SLB): First Take: SLB 4Q EPS falls short on lower than expected margins - Goldman Sachs - Jan 18, 2008

News
This morning, SLB reported 4Q07 EPS of $1.11, which was $0.01 below our estimate and $0.02 below the Street estimate. A lower than expected tax rate contributed $0.02 to the results. Even with the stock down 14% since Monday, we expect this shortfall to put additional pressure on the stock and the services sector this morning given SLB's more tempered outlook on the US Land market and history of repeatedly beating earnings expectations. The severely lower-than expected operating margins (26.7% vs. our 28.3% estimate) will likely draw the most attention on the call, especially in NAM where operating margins fell to 25.4% from 30.8% in 4Q06 and 26.9% in 3Q07 due to lower land stimulation pricing. Revenues of $6.25 billion were actually above our $6.1 billion estimate, and SLB reported better than expected results across all geographies in Oilfield Services - ranging from 1% better in Europe/CIS/Africa to 7% better in Middle East/Asia Pacific. This helped offset 7% lower than expected revenues in WesternGeco partially caused by drydocking and ship transiting. Our estimates and price target are under review.

Analysis
The margin weakness was the most surprising aspect of the quarter and we will look to the conference call to get a better sense as to the impact from temporary factors like IPM startup costs in Mexico, weather delays in North Sea and Mexico, and seismic vessel drydocking and transit versus fundamental challenges like US land pricing.

Implications
SLB's results confirm the growing concern over the past few weeks for 4Q earnings season for the oil services sector. We expect SLB's margin weakness in North America and its commentary on lower pricing in US land will add to the concerns for HAL and BJS. Its long-term outlook on the international land market and seismic market remained quite favorable, though it did comment that high utilization of offshore rigs and limited newbuilds entering the market could limit growth in the near-term.
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